Friday, April 27, 2012

Fearing Hayek - Sheldon Richman

Economics and business reporter David Warsh is getting much attentionfor suggesting that F. A. Hayek, far from being one of the two most prominent economists of the 1930s—the other being Keynes—is rather more like the woman who was thought to have won the Boston marathon in 1980 when in fact she had joined the race, mostly unnoticed, a half-mile from the finish line.

Hayek’s fans “have jumped a caricature out of the bushes late in the day and claim that their guy ran a great race,” Warsh writes.

“But the fact remains that Hayek just didn’t contribute very much to the development of technical economics,” he continues.

Warsh, whom we may judge by the fact that he calls The Road to Serfdom“an embarrassment,” nonetheless does have some positive things to say about the 1974 Nobel laureate: “With the publication of ‘The Use of Knowledge in Society’ in the American Economic Review in 1945, he essentially won on the ‘calculation debate,’ conducted with Ludwig von Mises and Oscar Lange, concerning the possibility of central planning.”

Considering how many respectable economists favored central planning—essentially the abolition of spontaneous competitive markets—until fairly recently, that would seem to be no mean feat. He also said that “Hayek himself may yet turn out to have been a very great economist after all” because of his work showing “that markets are fundamentally evolutionary mechanisms. . . .” Warsh even suggests that Hayek may be misjudged today because (quoting David Colander) he “was running a different race” from most other economists. We’ll get back to this point.

As McGill University professor Jacob T. Levy surmises, not everyone eager to dismiss Hayek as a lightweight read Warsh’s post to the end. Take Paul Krugman, ever ready to trash anyone who doubts that Keynes was the fount of all wisdom: “David Warsh finally says what someone needed to say: Friedrich Hayek is not an important figure in the history of macroeconomics. . . . [T]he Hayek thing is almost entirely about politics rather than economics. Without The Road To Serfdom—and the way that book was used by vested interests to oppose the welfare state—nobody would be talking about his business cycle ideas.”

The Hayekian wing of the blogosphere has responded in force, and properly so. A common theme is that Hayek furnished the grounds for a proper skepticism about macroeconomics, the branch of economics launched by Keynes that treats large statistical aggregates (demand, income, unemployment, and so on) as though they were concrete entities that interact with each other according to fixed quantitative rules rather than historical “summations” of individual purposeful actions in a particular institutional context. As Hayek wrote, “Mr. Keynes’ aggregates conceal the most fundamental mechanisms of change.” (See Steven Horwitz’s “Mr. Keynes’s Aggregates.”)

Hayek’s influence in modern economics is ubiquitous, even if sadly modern economics is not as Hayekian as I would like it to be. Information economics, theories of dynamic competition, equilibrium theory of the business cycle, and complexity theory all owe a debt to Hayek’s economic contributions. The work on legal origins owes a debt to Hayek’s work on law and political-social philosophy as well. Hayek impacts the DNA of economics and political economy to such an extent that many are unaware of the pervasive influence. . . .

The final problem I have with both Krugman and Warsh is that they don’t actually consult the historical record and the accounts of those who were there in the 1930s when the battle was engaged or the direct citation evidence from post-WWII thinkers. . . . Instead they rely on impressionistic accounts from their education and discourse communities, and cherry-pick from recent journalistic histories of economics.

And there’s this from GMU professor Alex Tabarrok at Marginal Revolution:

It is true that many of Hayek’s specific ideas about business cycles vanished from the mainstream discussion under the Keynesian juggernaut but what Krugman and Warsh miss is that Hayek’s vision of how to think about macroeconomics came back with a vengeance in the 1970s. . . .

Hayek was an important inspiration in the modern program to build macroeconomics on microfoundations.

GMU’s Russ Roberts responded this way at Café Hayek:

Was Hayek an important macroeconomist? I would argue that the macroeconomic skepticism of the later Hayek is more valuable than the macroeconomic theorizing of the early Hayek. But he wasn’t an important macroeconomist in the mainstream sense of the title. So what? That’s a badge of honor. He was merely a great economist, without any prefix.

There are others, but I will close with a post written by New York University’s Mario Rizzo, one of the most perceptive people I know, at ThinkMarkets. Remember the remark above that “It could have been that Hayek was running a different race”? That’s Rizzo’s take:

I think the real issue is this. Hayek’s approach attacks, root-and-branch, the macroeconomic way of thinking. It is not simply a challenge to a particular theory of the determinants of mass unemployment, inflation, business cycles and the like. Hayek is not accepting the rules of the game or the parameters of the sub-discipline of modern macroeconomics. . . .

In short, he does not want to focus on aggregate spending and aggregate consequences. Hayek’s approach says: Let us pierce the veil of aggregates and look at the distortive effects on relative prices and relative output produced by boom-time credit expansions. Let us look at the distortive effects that booms leave us as we work our way through a recession. . . .

Suffice it to say this greatly erodes the intellectual capital of a field of economics—although one not noted for its successes. It mocks the claim that Keynes was a true revolutionary in economic thought. It opens the possibility that he was muddled, inconsistent and unaware of the contributions to monetary and business cycle theory made by the “classical economists” on the eve of the General Theory.

Hayek is important politically for demonstrating the practical social necessity of individual freedom. But he is just as important for what he taught us about markets: They provide the only way for human beings to overcome their individual deficiencies in knowledge, which would otherwise keep them from flourishing through social cooperation and the division of labor.